Bernanke denies currency war and other highlights of exchange with Sen. Corker

The exchange between Federal Reserve Chairman Ben Bernanke and Sen. Bob Corker, a Tennessee Republican, was as testy as it was topical. Bernanke denied engaging in a currency war and said stocks weren’t overvalued in that brief exchange. Courtesy of Federal News Service, here’s a transcript of the exchange. And see our coverage and live blog of the hearing.

SENATOR BOB CORKER (R-TN): Thank you, Mr. Chairman. When the Fed decided it was going to stimulate a global currency war, as it did, did you embark on that thinking, well, you know, our country’s in trouble, and let’s — sort of the heck with everybody else, or did you think it would leverage the wealth effect, if you will, if everybody had a race to the bottom? I know the Fed has been really purposeful in trying to create this sort of faux wealth effect. Did you think it would multiply your efforts?

And speaking to that sort of overall wealth effect — I know you all do calculations all the time, but could you tell us exactly what sort of the wealth effect is, the part of it that’s not real, that if you were to stop doing what you’re doing as it relates to monetary supply today, how much of a diminishment in national wealth would take place?

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Bernanke before Senate panel

MR. BERNANKE: Well, on the first question, we’re not engaged in a currency war. We’re not targeting our currency. The G-7 put out a statement, which was very clear, that it’s entirely appropriate for countries to use monetary policy to address their domestic objectives; in our case, employment and price stability.

Our position is that our expansionary monetary policies, which are being replicated, of course, in other industrial countries, are increasing demand globally and helping not only our businesses but also the businesses in other countries that export to us. And so this is not a beggar-thy-neighbor policy; it’s one that benefits our trading partners.

SEN. CORKER: But the wealth effect use is something you have tried to stimulate here, and I wonder if you could tell me how much –

MR. BERNANKE: Yes. That –

SEN. CORKER: — how much wealth diminishment would take place if you were to, if you will, move away from the punch bowl.

MR. BERNANKE: Well, there would be some, but I would point out that — if you look at the stock market, for example — that the so- called equity premium, the risk premium associated with stock prices, is actually quite wide. In other words, stock prices by that metric don’t appear overvalued, given earnings and given interest rates. Now, if interest rates went up some, that would have some effect on stock prices.

But the point here is not to create what you’d call a faux wealth effect; the point here is to stimulate the economy, create some forward momentum in growth and employment, and that in turn shows up in earnings, and that creates a genuine increase in wealth. Same with house prices.

SEN. CORKER: So I think that — you know, I don’t think there’s any question that you would be the biggest dove, if you will, since World War II. I think that’s something you’re rather proud of. And we have a federal government that is spending more, relative to GDP, than at any time since World War II. Those are working well together in that the Fed is actually purchasing a large portion of the new debt issuances as we live beyond our means. And so it’s very — it’s working very well together in that regard.

I’m just wondering if you — if y’all talk at all in your meetings about the degrading effect that’s having on our society and how it’s basically punishing people who’ve done the right things and throwing seniors under the bus and others that have saved money. Do y’all ever talk about the longer-term degrading effect of these policies as we try to, you know, live for today?

MR. BERNANKE: I think one concern we have is about the effect of long-term unemployment on people who don’t have jobs for years. That means they’re never going to acquire skills; they’re never going to be a productive part of our workforce. The jobs part is very important.

You called me a dove. Well, maybe in some respects I am, but on the other hand, my inflation record is the best of any Federal Reserve chairman in the postwar period, or at least one of the best, about 2 percent average inflation. So we have worked on both sides of the mandate, and we’re trying to achieve a stronger economy for anybody. I don’t think there’s any degrading going on.

You mentioned in particular the issue of savers, and I think that is an important issue. I would just point out that if we tried to raise interest rates to — from, say — current 10-year yield
/quotes/zigman/4868283/delayed10_YEAR is 2 percent — if we tried to raise to 3 or 4 or 5 percent while the economy was still weak, it could not be sustained. Our economy’s not weak (sic) enough to sustain high real returns to savers. If we tried to do that, we would throw our economy back into recession and we would have low interest rates like the Japanese do.

The only way to get interest rates up for savers is to get a strong recovery. And the only way to get a strong recovery is to provide adequate support to the recovery. So I don’t agree with that premise.

SEN. CORKER: Yeah. Do you concern yourself at all with just the whole notion of being perceived — you know, most — we watch regulatory capture take place here, where basically the regulators end up working for the people that they regulate. And, you know, we had TARP, which most people who voted felt like that was a needed thing during a crisis, and then we’ve had this easy money policy, which really allowed the big institutions, especially on Wall Street, to really reap tremendous benefits in the early stages without doing anything.

And then you’re getting ready, I guess in a few years, as you alluded to, when interest rates rise, to basically have to print money, to sell securities at losses, and then pay interest on reserves, which, people have pointed out — and I think y’all have talked about — is going to be billions and billions of dollars going to these institutions that, again, you regulate.

Do you concern yourself at all with the Fed being viewed as, you know, not as independent as it used to be and working so closely with many of these institutions that you regulate?

MR. BERNANKE: Well, we’re concerned about perceptions, that true, but — that’s true, but none of the things you said are accurate. For example –

SEN. CORKER: Oh yes, they are.

MR. BERNANKE: Well –

SEN. CORKER: Yeah.

MR. BERNANKE: So to take the case of paying interest on reserves, in the exit (ph), for example, that is — number one, that is beneficial for the taxpayer because on the left-hand side of the balance sheet is reserves, but on the right-hand side is the securities that we hold, which pay a higher interest rate than the reserves. So by doing that, we actually make a profit, which we remit to the Treasury.

SEN. CORKER: (Inaudible.)

MR. BERNANKE: We’re not helping the banks. We’re not helping the banks because –

SEN. CORKER: Not when you exit (ph); when you — when you begin to draw the money supply (ends ?), it’s going to be very, very beneficial to these institutions.

MR. BERNANKE: Why?

SEN. CORKER: Oh, they’re going to be yielding huge returns on their reserves as you pay the –

MR. BERNANKE: We’ll be paying market rates. We’re paying exactly what they could be getting in the repo market, in the commercial paper market, anywhere else.

SEN. CORKER: Yeah.

MR. BERNANKE: There’s no subsidy involved.

SEN. CORKER: OK.

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